FTSE underperforms as earnings disappoint, techs point lower

The major European stock indices are higher today with gains ranging from 0.5 to 1.5 per cent. The FTSE is at the lower end of this range following the release of disappointing earnings results from some of the London-listed companies. These include Standard Chartered, Lloyds and BG. BP’s earnings were not great either for obvious reasons, namely weaker crude oil prices, but they nevertheless beat the censuses forecasts. Overall, it has been a quiet day so far with investors awaiting direction from the US. As well as key economic data, including the latest durable goods orders and a consumer confidence survey, another 49 of the S&P 500 companies are reporting their quarterly results today including McDonalds, Pfizer and Facebook. But the key fundamental event is the FOMC statement on Wednesday and it could be a long wait until then. Judging by the reaction of the equity markets, investors expect the Fed to deliver another dovish tone at the conclusion of its meeting policy, even if it fully cuts the remaining $15 billion monthly asset purchases. In fact, there has been some speculation that the US central bank may only taper QE by $10 or even $5 billion at this meeting; thus if these expectations are not met, we may see an initial sharp drop in global stock prices. But one way or the other, QE will come to an end soon. When it does, it will be interesting to see how the markets will react as many feel that QE was one of if not the main reasons why the markets have rallied to these extreme highs. Thus, without QE, they argue, the markets should fall back significantly.

That’s why it is important to keep a very close eye on the charts. Yesterday we looked at the Euro Stoxx 50 index which was displaying a couple of signals that suggested the recovery trend was weakening and that another leg lower may be on the cards soon. The FTSE is also painting a similar technical picture. As you may recall from our previous articles (Here and Here) the index has done exactly what the technicals suggested at the time: beak lower. First it was the repeated failures to break above sturdy resistance around the 6900 area. This correctly suggested that the market had reached a near term peak. As a result, the index took out its long-term bullish trend line that had been in place since 2009 when the global markets had bottomed out following the financial crisis. After breaking the trend line, the index went on to drop to the key 6000-6100 support range a couple of weeks ago, which has held firm upon the first attempt. Since then, the FTSE has been in a recovery mode. But the pace of this recovery is now slowing down and so there is a danger that another sharp move lower could be on the cards now. Interestingly, this could come around the time that QE is expected to end. Meanwhile, a decisive break back above the broken trend line (6450) would all but invalidate my bearish view. In that case, expect a move towards 6580 (61.8% Fibonacci level of recent correction) or even 6695/6700 (200-day moving average) in the near term.